The S&P/Case-Shiller Home Price Indices measures the residential housing market, tracking changes in the value of the residential real estate market in 20 metropolitan regions across the United States._________________大道至简 锦衣夜行

Steve Forbes: Well, Brian, good to have you with us. And congratulations on your book. Since I'm an author, I love promoting other books too.

Brian Wesbury: Yes.

Forbes: Very, very good book here.

Wesbury: Thank you.

Forbes: And let's start with that and then get into the core of your book, which is about what really caused the crisis. But first, your good news for the new year.

Wesbury: Right.

Forbes: The economy's going to grow.

Wesbury: Yes.

Forbes: The stock market's going to go up. Housing may be short. Tell us all of this.

Wesbury: Yeah, exactly. Well I do that we're in the V-shaped recovery. And I think there's a couple of reasons that that shocks a lot of people. No. 1, they became convinced we were in the Great Depression II. I never thought we were. And so, that panic that we had, we're bouncing out of it. No. 2, this isn't a great thing, but the Fed's super easy. And when you're floating on a sea of liquidity, that means the economy is going to boom.

And No. 3, I think people kind of sold short in their mind capitalism. They forget how robust and resilient the economy really is. And that's why I think we're in the middle of a V-shaped recovery. And it's going to last well into probably 2011 before government starts to erode at its edges. But I think we're in for a great year in terms of the stock market and a great year in terms of the economy as well.

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Valuing the Stock Market

Forbes: Now on the stock side, just an aside, you have a formula to determine true value of the stock market. Can you quickly explain it and then give us the shocking figure your formula shows the market's fair value truly is?

Wesbury: Yeah. Well I use a capitalized profits approach to the stock market. And that is I'm not going to take what the S&P 500 companies tell us their earnings are; I'm going to take what the IRS says that they reported. And you know, in this figure, there's all kinds of profits. But it's a good proxy for corporate profits. And then we divide it by the 10-year Treasury yield. That gives us a capitalized profits index. I then use statistics to make sure I'm not artificially overvaluing or undervaluing.

Forbes: What roughly are profits today, according to the IRS?

Wesbury: Well they're about a trillion dollars in the past year, roughly. And that's a good question--

Forbes: So you discount that by roughly 3.5%, the 10-year Treasury.

Wesbury: Exactly. And then that gives you, it gives you a number, but it's not necessarily equivalent to the S&P 500 or the Dow Jones. It's just an index. And then that goes back to the '50s. And then, if you tie the S&P 500, say, equal to that index in 1953 third quarter and then run it out, you can determine whether the market is overvalued or undervalued to date.

And what I do is I go to every single quarter in history. So I don't count on just picking one point in time, saying everything was perfect then. I look at an average. And what we're seeing right now, is if you use the current 10-year Treasury yield, which is about 3.8%, that the market should be worth 18,000 or 19,000, would be the Dow Jones industrial average.

Now I believe that the 10-year treasury is way too low. The Fed is artificially holding the yield curve down. So in my models, what I do is I put in a 5% rate to be conservative. And that leaves me with the market being undervalued by about 40 or 45% today easily. And don't forget, profits are growing right now, probably going to be up 25% in 2010. So what that says is that this stock market is undervalued by significant amounts right now.

Housing Shortage

Forbes: Now on the housing side, you also make the point that even though we hear about foreclosures, huge inventory, that given the natural rate of new houses we need, we're going to be running through that inventory.

Wesbury: Yeah, exactly. We need 1.5 million houses per year just to keep up with population growth. And then if you throw in, you know, fires and tear-downs and just worn-out properties, we need 1.6 million or more per year. Right now we're down to about six and a half, seven months' inventory, whether you look at new homes or existing homes. Yes, there's foreclosures coming into the market. But we're only starting right now.

The housing starts are between 500,000 and 600,000. We're starting one-third of the houses we need just to keep up with population growth. And that can't last. I think one of the secret investments, if you will, over the next decade is going to be housing. It is extremely cheap, inflation is on the way. But people are running away from it. You know, it's that old adage, "When there's blood in the streets, that's when you invest." And this is the time, I think, for real estate.

Forbes: Now this gets to something very important, everyone, including you make reference to '75, '76, even the '30s. You get these monster comebacks, monster rallies. Doesn't mean we're on the right course, but you do get these surge upwards. Are we in a '76 kind of situation? Is this just really an inflationary bubble that's going to make us look so good? And are people onto it? Are we still going to get deceived even though the experiences of the past should tell us, "This isn't for real?"

Wesbury: Right. And that's a great point. You know, in '72, '73, '74 was one of the worst bear markets in history. And also, if you go back to the '70s, we put in Medicare and Medicaid and welfare was expanded dramatically, food stamps were put in.

Forbes: EPA.

Wesbury: EPA. All the regulations that we had. We went off the gold standard--well, we closed the gold window. Wage and price controls, all that horrible stuff was going on in the '70s. And yeah, we still had this boom in '75, '76. And I do believe that people understand monetary policy in a way. But when you float on a sea of liquidity, you can't help but see asset values go up. And so, what I've been suggesting to people is to make hay while the sun shines, so to speak.

Now, when we get to 2011, if we have passed a health care bill, if we pass cap and trade, if tax hikes have gone into place--big tax hikes, you know, gone back to the pre-Bush tax rates--then we're gonna have a price to pay. But I don't think it's going to be like a W. It's not like we're going to have all these gains and then we're just going to give them all back again.

Even in the '70s, we went up and then we sort of, kind of flattened out. We have lots of inflation, which eroded people's asset values. And so I think there's going to be plenty of time, in other words, for us to realize that things are getting weaker. So I'm a short-term bull but I'm a long-term worrier. And I think there's a big mistake here.

Forbes: So what you're saying here is that you've gotta be nimble.

Wesbury: Yes. I think you have to be very nimble. But one of the things that is disturbing to me these days is that lots of people are taking their conservative political views and arguments; they should be making moral arguments against big government, Steve, like you do. But instead, they're translating it into, "If Obama's president and he's talking about health care, that means the stock market's going to go down, so buy gold."

I think that's just wrong. You have to separate the political arguments from the financial investor, economic arguments. And I try to do that. I'm a conservative. I don't think nationalized health care is a good idea. I don't think cap and trade's a good idea. I don't think tax hikes are a good idea. But I also realize that in the short-term, even though those things might be coming, we can still have a rally in the midst of those bad policies.

Inflation and Jobs

Forbes: Now, on the inflationary side, you say you people are underestimating--

Wesbury: Right.

Forbes: The amount of inflation that's going to be coming in the next two or three years, a weak dollar. What's that going to mean on unemployment?

Wesbury: Right. Here's the interesting thing, is we're at 10% unemployment. And you know, please don't misunderstand my optimism about the economy as believing everything's perfect. There's too many people unemployed. I mean, no one in their right mind would argue that that's not a problem. The thing that's really going to hurt us over time is that the size of government has grown. We have gone from 18% of GDP, government spending was 18% of GDP when George Bush took office. It is now on a long-term path of 23 to 24% of GDP, which means the underlying rate of unemployment in the economy is going to be higher. The bigger the government is, the smaller the private sector is, the less opportunity there is and the higher the unemployment rate. So we're going to have a declining unemployment rate as the economy gets better.

But it's not going back to 5%. And the rate of inflation, as you pointed out, is going up. There's no doubt about that. And that will also hurt the long-term jobless rate as well. When you have high inflation and big government, that's a recipe--just look at Europe, I mean, in a way. They haven't always had high inflation. But they're had big government. And they've had 8% or 9% or 10% unemployment for a very long time.

Forbes: One of the points you make in your book is that the more government spending, the more unemployment.

Wesbury: Right. Exactly. And that's it. Europe is--

Forbes: Goes against the whole myth that we get in the media.

Wesbury: Right. Well that's it, they, you know--Cash for Clunkers is a perfect example of this, right? You know, you can see the car sales increase. They look great. You know, car sales are going through the roof. But we don't realize is that they had to take the money to give cars away, basically, or big chunks of car away from somebody else, which means there's a hairdresser in Seattle who doesn't have a job because they're selling more cars in Detroit. And no one ever understands that, because it's what Bastiat called "the seen vs. the unseen." And we always forget about the unseen, because by definition--

Forbes: Well, one of the points you make, just the real experience is that from '60 to '79, government grew and unemployment grew.

Wesbury: That's exactly right.

Forbes: That even when you had a boom time the unemployment never reached as low as it did the previous time.

Wesbury: Right.

Forbes: And then we had a 20-year period of the opposite, government became relatively smaller and unemployment reached a low of what, 3.9%?

Wesbury: 3.9%. That's exactly right. I mean, you can see it so clearly, as the government grew in the '60s and the '70s, the unemployment rate went up. And then Reagan and Clinton, believe it or not, shrank the size of government relative to GDP and the unemployment rate went down to 3.9%. Now it's on its way back up. And we will not get back the old lows unless we shrink the size of government.

Forbes: So conservatives are sort of making mistakes saying that this year, 2010, will be a disaster.

Wesbury: Right.

Forbes: They should say we've got an inflationary boom.

Wesbury: Right.

Forbes: Short-term, it's like getting a fix of drugs or bottle of booze.

Wesbury: Right. Exactly.

Forbes: But it's not going to prevent the hangover.

Wesbury: Right, exactly. I think conservatives have made a couple of mistakes. And you know these very well. And that is many of them supported TARP back in 2008. And now they're saying, "Well, big government hurts." And what I ask them is, "Well, wait a minute, last year you voted for big government. You wanted but you argued for big government. This year you're arguing against it. That means your big government's good and their big government's bad?"

And then that, you know, so the other thing is, is that the more they argue that the economy's going to be bad this year, the more they will build the case that the stimulus worked. So I think they're walking in to a corner, a trap. And I try to warn them about that in this book.

Cause of the Crisis

Forbes: Now, let's get to the real nubbin of the thing. And that is the cause of the disaster.

Wesbury: Right.

Forbes: You know the rap, that it was free markets going on a binge. And tell us the real cause and then more specifically, answer Ben Bernanke in the paper talking about why it wasn't the Fed, it was deregulation or new exotic instruments, exotic mortgages that created this whole thing. First, what do you see are the core causes of the crisis?

Wesbury: Sure. I mean everyone I think that's going to watch us talk today understands the role of Fannie Mae and Freddie Mac and CRA and I think that's pretty well understood. The government got involved in government wanted to move people in houses. So we did everything we could. But one of the things, and I think the most important force, was when the Federal Reserve drove interest rates to 1% back in the early 2000s.

Forbes: By the way, on Fannie and Freddie, isn't it true, does the government, as Fanny and Freddie expanded more and more they, in effect, forced private banks to go out on the more riskier curve because that was the only territory left for them?

Wesbury: Yeah, that's exactly right. The bigger Fannie and Freddie got, the banks could not compete. Because Fannie and Freddie have the implicit guarantee of the government, which means they can borrow cheaper than banks could in the open market. Therefore they could offer products at lower yields and still make a spread that was wider than banks.

The banks had to go into the subprime arena to compete. That was the only place left for them, in a sense. Because Fannie and Freddie had taken out the profit margins in the conventional mortgage market. It just didn't exist. And when you add in there the fact that the Federal Reserve lowered interest rates to 1%, there's this idea that somehow capitalism failed, you know, in 2007 or in this housing bubble, that greed and stupidity and ignorance. And what I make the case, in my book and elsewhere, and you have also, is that when you have 1% interest rates people make decisions that they wouldn't otherwise make. And you're creating a mirage. The Federal Reserve created a mirage that made it look like money was cheaper than it was, that the house that I wanted to buy was within my grasp.

And if we would have had interest rates that were more in the 4%, 4.5%, 5% range, we never would have had the housing bubble. And that's why I think Ben Bernanke's argument that the Fed didn't create the bubble is just a bunch of malarkey. It's just not true. One percent interest rates were the driving force that caused all of this.

Forbes: Now, so the natural rate of interest in your mind is the nominal growth of GDP, not real growth or some other formula. Just take the dollar, nominal growth.

Wesbury: Right, that's it. It's very simple. It's just, you know, this comes from Ludwig Von Mises and I guess you could throw Hayek in there, although he was the student. But Mises and Fiher and Bixel, they all talked about a natural rate of interest. So you say, "What is the natural rate of interest?" It sort of comes out of the economy.

And I said, "Well let's just take nominal GDP. It's pretty simple. It's the average growth rate in the economy." Some companies boom--Google grows 80% a year; some company are, you know, losing business. New York Times Co., shrinking 10% a year, whatever that is. On average they're growing at nominal GDP. If I can borrow way below that, then what you're going to see is an arbitrage exists.

If the Fed holds rates too low--they're going to, cause it's going to--what that signals is that the Fed is too easy. If they hold them way above, they're too tight. So I think is it's nominal GDP. And if you use that model and you go back and you look at the early 2000s, it is very clear. John Taylor's rule is great, but he relies on a formula and a lot of estimates. I just like the simple GDP rule. And by the way, right now it says the Fed is way too easy and that's why gold is going up and commodity prices are going up. The dollar is weakening. All of that is the aftermath of the Fed holding interest rates below the natural rate.

No Securitized Assets

Forbes: And a side question on that. You talk about housing being short. But given what they have done to the mortgage market, I mean, who's going to buy a mortgage-backed security when you don't know where you stand if something goes wrong?

Wesbury: Right. And we are not. Here's one of my beliefs. And I don't think we've talked about this. But it's that we will not have a securitized asset market back, when we securitize auto loans and credit card loans, until we kill--bury under six feet of earth--mark-to-market accounting. Because if I'm an institution, I won't if that rule is even anywhere there, they can come back to life and come get me, I don't want to own any of those.

Forbes: Before we get to mark-to-market, which is the 800-pound villain in this thing, on the mortgage side, in terms of buying, even if you wanted to buy a mortgage-backed security, you're an individual, you don't care about mark-to-market. The Fed, hasn't it muddied where you stand--

Wesbury: Oh yeah.

Forbes: If something goes wrong, you don't know whether you're going to be treated like a home equity loan. And so why did I lend at five when I could have charged 10?

Wesbury: Exactly. Well, I mean, the courts have become involved. The government has become involved. The Fed has bought hundreds of billions of dollars of mortgages and artificially lowered rates. So if a bank wants to enter the mortgage market, the only buyer is the Federal Reserve. So you're absolutely right that there's this kind of an artificialness--that's not a great word--to the whole mortgage market today, which is of concern.

And when we get out there in 2011 that's an issue we have to deal with too. But I guess there's two ways I look at this. We're operating right now at 500,000 starts a year. There are banks that will do mortgages for their best customers and the government is getting involved in other customers. And that's easy to do. I mean, and so I think everything above that, I mean we could have a 20% gain in housing with just a couple hundred thousand starts. So as that begins to get worked up, as those markets ease up and free up, I think the growth in housing can still be there, even though the market's muddy.

Housing Collapse

Forbes: And one other thing, before mark-to-market, make your point that housing had already collapsed by the time 2008 had rolled around.

Wesbury: OK. Yeah, well, you know, new home and existing home sales peaked in 2005. They were already down by 40% before '08 ever happened. Housing prices peaked in '06. They were down, I forget the numbers, but 35%, 40% by the time '08 rolled around. So here we were, everybody said that this crisis had started in '08. It didn't. And by the way, even though housing was down that much, GDP was still growing in '06 and '07 and early '08.

Forbes: Which makes your point: even though housing is a huge thing in people's balance sheets--

Wesbury: Right.

Forbes: In terms of economic activity?

Wesbury: It's about 5% of the economy. That's about it. And you know, I'm not trying to dismiss it, but it's just not that big of a part of GDP.

Mark-to-Market's the Culprit

Forbes: Now, let's get to the thing that still overhangs everything today, mark-to-market accounting.

Wesbury: Yeah. You know, I think the best way to think about this is you go back to the '30s. And we had mark-to-market accounting. One of the things I discovered in my research was--and Bill Isaac was the one that turned me on to this--but I found Milton Friedman's book The Great Contraction. In there he spends a lot of time on mark-to-market accounting.

And he shows how it was the cause of many bank failures--in fact, most bank failures in the early 1930s, which led to this kind of snowballing effect. In 1938, FDR and the administration then got rid of mark-to-market accounting and voila, the economy starts to improve almost immediately. I think there's a lot of things that were going on. The Fed got easy. It wasn't just World War II. But mark-to-market, as I look back in history, I've now added that to my mix of what brought us out of the Great Depression.

Forbes: Now in essence mark-to-market accounting means that for regulatory purposes of a bank, it must mark up or down the value of all of its assets, the mortgages, what?

Wesbury: Well it depends on which kind of bank and what kind of assets. But what was happening, there's really two columns here. So, the bank has to take the value of assets that are in a certain silo, which they are forced to mark to market, which a level-three asset, that was one of the rules that was added at the very end; the minute it's a level three, it has to be marked to market. And how you go from a level one or a level two to the level three is to have a downgrade. And so the minute when S&P starts to downgrade, then the asset's a level three. Now they have to mark it to market. And the market had dried up. There was no market for these assets. And I think, I believe, by the way, that the accounting profession pushed mark-to-market accounting.

Forbes: They said, "Take liability."

Wesbury: Yeah, that's right, after Arthur Andersen. But what we did is we held an accounting firm liable for the actions of the company, of a few people. And so the accounting professions says, "Well, we're gonna get rid of all of this objectivity. We're just gonna be subjective about everything and therefore we're gonna get three bids. And that's how we're gonna values securities. "And if there's, you know, and that's the way it is. And we're gonna get three bids." And what that did was it divorced the value of assets from any cash flow. And I believe that's when we started to see a problem snowball. You know, if you did the list--WaMu, Wachovia, Lehman, Bear, AIG--

Forbes: In other words, is it fair to say that most of the losses were book losses rather than actual cash losses?

Wesbury: Absolutely. AIG is probably--

Forbes: But these institutions actually had positive cash flows?

Wesbury: Yes. They had positive--

Forbes: But yet went broke?

Wesbury: Yes. They had positive cash flows. But this accounting rule opened up a grand canyon in their balance sheets that they couldn't fill. And by the way--

Forbes: So in essence, even if a person was still making a payment on the mortgage, the way the thing worked, especially with packages, you had to mark it down even though it was still money good.

Wesbury: That's exactly right. And that's, I use the--

Forbes: Now you also make the point that if we had done that 20 years ago, when we had a banking crisis, S&Ls, Latin American loans, we'd have destroyed at least the top eight commercial banks in this country.

Wesbury: At least. And they had 260%, the biggest eight banks had 260% of their capital lent to Latin America. And that debt was trading at 10 cents on the dollar. They were all gone. You know, one of the pieces of research that I did for this book is I went back to the early '80s. By the way, those banking problems were caused by an easy Fed too. They were holding interest rates too low.

Banks lent to Latin America, to farmers, to oil. Penn Square, if we remember that. And I added up all the problem loans that we had then. It was 6% of GDP. At the beginning of this whole the current financial issues, the subprime alt A it was about 3.5% to 4% of GDP. So our problems this time around were smaller than our problems in the early 1980s. But mark-to-market accounting is what took a smaller problem. It was still a problem, and a relatively large one, but turned it into a catastrophe. That's the mixture. The Fed was too easy and--

Forbes: Now where does it stand now? They modified it.

Wesbury: Right.

Forbes: You count the congressional hearing in March, which turned the stock market around. Of course.

Wesbury: By the way, isn't that interesting that they did TARP, they did two government stimuluses, the Federal Reserve cut interest rates to zero, starting buying commercial paper. All of those things, none of that turned the market around until they changed mark-to-market accounting. That was the, to the day, when the stock market bottomed and started going up. To me it's so obvious how big of a problem that was.

Forbes: Now what they did was they didn't suspend it or get rid of it. They, in effect, said, "If you have an illiquid market," which sort of means this thing is sort of still lurking out there.

Wesbury: Yeah, exactly. What they say is if you're receiving payment on the mortgage, then you can value it at that cash flow at par, basically. But we reserve the right to kind of go, you know, but they allowed banks to use cash flow. By the way, if you sit down and talk with FASBY, and you know this, they will say, "Well it was always that way. It was misapplied. The rule was misapplied."

See, I think one of the problems with securitized assets, they're not coming back until we kill this thing. I believe we have to suspend mark-to-market accounting fully, forever. We learned this in the '30s. We've learned it again today. We need to get of it. And until we do, I think it still lurks. And as a result, I don't think the securitized marketplace will come back. But what's fascinating--here's another thing--that once they change mark-to-market accounting, all of the sudden all the TARP funds got paid back within a year. Banks raised $100 billion in private capital, no more--

Forbes: Not to mention real estate investment trusts came back from the dead.

Wesbury: REITs came back from the dead. No major institution has gone bankrupt since. I mean, a bunch of little ones. And they're still going to continue to go. I mean, I'd be careful about little, because some of the institutions are bigger. But not the key ones, that are sort of part and parcel of our financial system. But we're gonna lose 400 or 500 banks. What people don't remember, too, is in the '80s we lost 2,755 banks in S&Ls. And yet the economy grew. We can grow even though banks are going under.

Not Consuming What You Think

Forbes: Now, one final thing. You deal with the consumption myth.

Wesbury: Yeah.

Forbes: That we're a nation binging on consumption. And you make the point, "No, if you look at the increase in consumption in the last 20 or 30 years, almost all of it is health care and education."

Wesbury: Right, exactly. And you know, it's interesting. It is. We went from--I forget the numbers exactly--from roughly 62% of GDP up to 72% of GDP as consumption's share of GDP. And over 95% of that is made up by increases in our health care expenditures and education expenditures. Education went from about 1.5% to 2.5% of GDP. Health care expenditures went from, I forget, but I think it was about 7% to 16% of GDP.

And that, you can think of those as investments. I mean, literally, they're for your life. They last a lifetime. They're not consumption. And so this idea that we've been profligate spenders and all--

Forbes: By the way, probably not a coincidence--

Wesbury: Just doesn't make any sense.

Forbes: That health care is not truly a free market.

Wesbury: Right. That's exactly right. Well, and Milton Freidman is--he always said, "The more the government [was] involved, the higher the cost and the lower the price." By the way, education too. So those are the two areas that you could argue that we have the biggest problems with in society. And those are two areas that government has the most involvement in. Higher costs, lower quality and they eat up more of GDP, where as spending on care and food and computers and all of that has gone down as a share of GDP. Those are the two areas where we keep spending more and more.

Rent is around $4K. The price from zillow is over 1.5M. $1.5M cash for just for 3% investment return should be much better than this rent business when you consider all other cost(property tax, insurance, and headache to deal with tenant).

Overall house price all depends on local job market and population.

Will Bay Area have another booming, like semiconductors in 1980s and internet/dotcom in 1990s ? I really doubt. If it won't, then the house price in Bay Area won't be able to go up crazy.

Don't forget the fricking Prop14 by Reagan, just as wonderful as JFK bringing union into public sector.

A record number of Americans were in danger of losing their homes in the fourth quarter, even as new delinquencies declined.

Loans in foreclosure rose to 4.58 percent of all mortgages, while those more than 90 days overdue -- the point at which lenders usually begin the process of seizing a property -- climbed to 5.09 percent.

Government efforts to prevent foreclosures have been thwarted by the biggest employment contraction since the Great Depression. U.S. companies shed more than 7 million jobs since December 2007.

U.S. home prices began declining in 2006 after reaching a peak of almost four times the nation’s median household income, an increase that had stretched the ability of many buyers to meet mortgage payments.

Unable to refinance, the least creditworthy borrowers started defaulting on mortgages as interest rates adjusted higher and their monthly payments ballooned.
The rate of subprime-mortgage delinquencies more than doubled in the two years ended last quarter, triggering $1.7 trillion of losses and writedowns for financial companies that invested in mortgage bonds.

Today’s MBA report（The Mortgage Bankers Association） showed payments overdue by 30 days or more for all types of mortgages fell to a seasonally adjusted 9.47 percent in the fourth quarter from 9.64 percent in the prior three months, the first drop since 2007’s first quarter.

The delinquency rate for prime loans fell to 6.73 percent from 6.84 percent, and the share of subprime late payments fell to 25 percent from 26 percent.

“We usually have a spike in fourth-quarter delinquencies because of heating bills and Christmas bills, but this time we had a sizable decrease,” Brinkmann said. “It’s not the end of the crisis, but it looks like a big problem may not be getting much bigger.”

Obama’s Plan

The administration’s primary anti-foreclosure plan, the Home Affordable Modification Program, or HAMP, resulted in 116,000 permanent loan modifications by the end of January, compared with a goal of as many as 4 million by December 2012, the Treasury Department said in a Feb. 17 report. In addition, 830,438 trial modifications were under way.

HAMP lowers mortgage payments to about one-third of a borrowers’ income by reducing interest, lengthening repayment terms and deferring principal repayments.

About one in every five U.S. homeowners with a mortgage is in so-called negative equity._________________大道至简 锦衣夜行

Jan. 19 (Bloomberg) -- The U.S. Treasury Department has failed to win agreements to get struggling borrowers’ home- equity debt reworked, among the biggest roadblocks to reducing foreclosures that may reach a record 3 million this year.

None of the lenders holding a combined $1.05 trillion in the debt has signed contracts requiring participation in the second-mortgage modification plan announced eight months ago. The largest banks remain “committed” to joining, Meg Reilly, a department spokeswoman, said in an e-mail.

President Barack Obama in February announced a $75 billion program to cut first-mortgage payments. The Treasury detailed a plan on April 28 in which second-mortgage owners modify or retire debt when the first lien is changed, saying it would be running in a month. The near-record level of home-equity debt held by lenders including Bank of America Corp. and Wells Fargo & Co. may lead to foreclosures that threaten housing stability after the worst slump since the 1930s.

“The issue of the second liens has to be escalated,” said Richard Neiman, New York’s banking superintendent and a member the Troubled Asset Relief Program’s Congressional oversight panel. The government should consider forcing banks to participate and to recognize the “true value” of second liens, he said.

Bank of America, Wells Fargo, JPMorgan Chase & Co. and Citigroup Inc. carry such mortgages at about $150 billion more than their value, according to estimates by Joshua Rosner, an analyst at Graham Fisher & Co. in New York.

Equity lines and other second mortgages rank junior to typical mortgages, meaning they get wiped out in a foreclosure unless sale proceeds from a seized home exceed the first debt.

Still Struggling

As Obama’s Home Affordable Modification Plan, or HAMP, lowers first-mortgage payments, some borrowers are still left with bills they can’t afford, according to Newport Beach, California-based Pacific Investment Management Co.

“Modifying the first mortgage doesn’t necessarily get the homeowner to good shape,” Scott Simon, head of mortgage-bond investing at Pimco, manager of the world’s biggest fixed-income fund, said in a telephone interview.

About 25 percent of homeowners who received trial loan modifications are failing to keep up with their reduced payments, the Treasury said Jan. 15.

Rosner said overvalued home-equity debt prevents residents from getting the aid likeliest to keep them in their homes: principal forgiveness.

First-mortgage owners usually won’t agree to the deeper principal reductions needed to reduce the loan to at or below the home’s value when home-equity holders aren’t willing to make sizable cuts, said John Taylor, chief executive officer of the Washington-based National Community Reinvestment Coalition.

Considering Changes

Three million U.S. homes will be repossessed this year as high unemployment and depressed values leave borrowers unable or unwilling to make their payments or sell, RealtyTrac Inc. forecast on Jan. 14. Almost 10.7 million, or 23 percent, of residential properties with mortgages were in negative equity as of Sept. 30, according to First American CoreLogic.

Policy makers may be able to reduce re-defaults on modified debt from an average of 57 percent within a year “significantly” more by getting mortgages lowered rather than by spurring larger payment cuts, New York Federal Reserve Bank researchers wrote in a December paper.

The government is considering changes to permanently cut balances on which borrowers owe more than the property is worth, said Michael Barr, the assistant Treasury secretary for financial institutions.

“We are in the process of reviewing that now as we have been continually,” Barr said on a conference call last week. “You have to be very careful not to design a program that would change people’s behavior across the country.”

Banks’ Efforts

Bank of America CEO Brian Moynihan “recommitted” to participating in the Treasury program this month as part of “our aggressive efforts to help customers,” Rick Simon, a company spokesman, said in an e-mail.

“We are waiting for final guidelines,” Simon said.

Citigroup is “actively engaged with the U.S. Treasury in finding a workable solution,” Mark Rodgers, a spokesman, said in an e-mail.

Wells Fargo is working with the government “to understand the program specifics,” Mary Berg, a spokeswoman for the San Francisco-based bank, said in a phone message.

Tom Kelly, a spokesman for New York-based JPMorgan, declined to comment.

Banks’ reluctance to write down second mortgages also hampers short sales, when homeowners sell a house for less than they owe.

Sticking Point

“If I had to name one sticking point, it’s the second mortgage,” said Ethan W. Gregory, an agent with First Coast Realty Associates in Jacksonville, Florida, who specializes in short sales.

Americans tapped home equity as values more than doubled between the start of 2000 and the market’s apex, and took “piggyback” loans in lieu of down payments.

Home prices rose in each of the six months through October, increasing 5.3 percent, after a record 33 percent plunge from the 2006 peak, an S&P/Case-Shiller index for 20 metropolitan areas showed. Gains were driven by a decline in the share of sales involving “distressed” properties that will reverse this year as foreclosures climb, Deutsche Bank AG said Dec. 18.

The government’s Home Affordable program offers subsidies to lenders, bond investors, loan servicers and consumers to rework first mortgages so that payments, insurance and taxes don’t exceed 31 percent of a borrower’s income.

Lender Relief

The Treasury said in April that home-equity lenders would receive a subsidy to reduce interest rates to as low as 1 percent. Lien holders could get as much as 12 cents on the dollar to retire debt. Officials said on a conference call that within about a month its program would start helping borrowers, and that as many as half of “at risk” homeowners had second mortgages.

The Treasury “has been working to create program infrastructure and technology, including a new platform that matches second liens to first liens modified under HAMP,” Reilly said Jan. 7. “Because there has not been a systematic method of notification to second lien holders when a first lien on the same property is modified, ramp up has taken some time.”

BlackRock Inc. CEO Laurence Fink, who oversees the world’s largest asset manager, has called the government’s effort flawed because of its treatment of second mortgages, which he said should be wiped out before first liens are touched.

“There is modification going on protecting our banks, protecting their balance sheets,” Fink said in a September interview. With the right types of changes, he said, “the homeowner is better off, America is better off, and you could say the first lien holder is better off.”

Loss Allowances

The Federal Deposit Insurance Corp. last year urged lenders to consider whether borrowers’ housing debt exceeds the value of their properties and whether first mortgages have been reworked when determining loss allowances.

Bank of America’s allowance for home-equity losses equaled 6.4 percent of its $152 billion portfolio as of Sept. 30, according to a slide from an earnings presentation posted on its Web site. Half the portfolio was tied to borrowers with debt exceeding 90 percent of their property’s value.

Spokesmen for Fannie Mae and Freddie Mac, the largest owners of first-mortgage risk, declined to comment. The companies were seized by the U.S. in September 2008 and are being supported by unlimited taxpayer capital through 2012, after drawing $111 billion so far.

While Home Affordable allows loan servicers to reduce borrowers’ principal instead of just their payments, such steps aren’t required and decisions are designated to the servicers.

The four U.S. largest banks, which own almost $450 billion of home-equity debt, are also the biggest servicers handling payments and collections on loans held by others.

“If they can get the first to eat it, why would they want to on the second?” Simon said.

To contact the reporters on this story: Jody Shenn in New York at jshenn@bloomberg.net
Last Updated: January 19, 2010 00:01 EST_________________大道至简 锦衣夜行

March 4 (Bloomberg) -- Fewer Americans than expected signed contracts to purchase previously owned homes in January, indicating the extension of a tax credit is doing little to lure buyers.

The index of purchase agreements, or pending home sales, dropped 7.6% after a revised 0.8% increase in December. Other reports today showed factory orders increased and first-time jobless claims declined.

The drop in contract signings adds to evidence the housing market at the center of the worst recession since the 1930s is struggling to rebound after reports last week showed unexpected declines in purchases of new and existing homes.

The market may get another blow this month when the Federal Reserve ends planned purchases of mortgage-backed securities. _________________大道至简 锦衣夜行

Where have all the buyers gone?Commentary: It's a great time to buy a home, but factors conspire against sales

By Irwin Kellner, MarketWatch
March 23, 2010, 12:42 a.m. EDT

PORT WASHINGTON, N.Y. (MarketWatch) -- It's the best time in decades to buy a house, and yet, buyers for the most part are nowhere to be found.

Interest rates on home mortgages are the lowest they have been in more than 50 years. What is more, the Federal Reserve is committed to keeping rates down.

Home prices have fallen sharply. Nationwide they are down more than 25% from their 2007 peaks -- in some really overbuilt markets like South Florida you can double this percentage.

These declines have made houses more affordable today than any time since the mid-1980s. Median home prices today amount to only 2.78 times median household incomes; they were four times incomes back in 2005.

Buyers can probably drive these prices even lower, since sellers are anxious, to say the least.

The number of homes for sale is at near-record highs compared with the number of homes being sold each month. Meanwhile, the combination of foreclosures and new-home construction continues to add to inventories.

Brokers' commissions are down. Six percent is no longer de rigueur; 4% or even less is more common. And as an added sweetener, the government will give home buyers a tax break, besides.

Yet sales remain weak. Both new and existing home sales have tumbled sharply from last year's levels -- not to mention from their all-time highs set in the halcyon days of 2005.

It's not for lack of credit. Contrary to popular belief, the banks are lending -- albeit more carefully than they did during the bubble era a few years ago.

Still, those who can muster up 20% of the price for a down payment and document their income for the past year or two -- the way it used to be -- should find most banks eager to do business.

All that said buyers remain scarce. Even the arrival of spring has not convinced prospective buyers to venture outdoors and at least look at the merchandise.

There are several reasons for this. One is that most people who buy a home have one to sell -- and, obviously, this is easier said than done.

Even more important, attitudes towards prices have changed.

As the bubble was inflating and prices were rising, people rushed to buy all manner of homes before prices rose further. Now, in a period of falling prices, buyers figure if they don't buy today, homes will be cheaper tomorrow.

It will take clear signs of price stability before buyers will be willing to make a bid, after all, who wants to buy a depreciating asset? (Hint: We do it all the time -- with cars, furniture appliances and the like.)

Buyers are also waiting for an improvement in the job market as well -- and this, perhaps, is the biggest hurdle facing home sales.

With unemployment as high and pervasive as it is, few households have the confidence enough to take the plunge and make the biggest purchase of their lives -- a home.

Maybe now that he's got his health-care program, President Obama will turn his attention to the main problem confronting people these days: job insecurity._________________大道至简 锦衣夜行